Evening Star Candlestick Pattern

The Evening Star and Evening Doji Star are top reversal patterns consisting of three candlesticks. Similar to the evening here on earth predicting that darkness will soon fall down upon the earth, the evening star candlestick pattern suggests that prices will fall. The first day of the evening star pattern consists of a long bullish candlestick after a preceding uptrend. Next, the second day candlestick gaps up, this means that the candlestick opens at a higher price than the first day’s closing price. The second day candlestick should be a little candlestick and technically, can be either bullish or bearish; but the main idea is that the real body of the second day is above the real body of the first day.

Lastly, the third day of the evening star pattern is a large bearish candlestick that closes well into the first day’s bullish candlestick real body. The charting package of ThinkorSwim (2011) requires that the third day candlestick close below the midpoint of the first day’s candlestick real body. Moreover, it is preferable if the third day’s candlestick gaps down, but this is not absolutely required for the pattern to be valid.

Evening Doji Star Candlestick Pattern

The variation between the evening star and evening doji star consists of the second day candlestick being a doji for the evening doji star candlestick pattern instead of a small bullish or bearish candlestick for the evening star pattern. As an informative sidenote, a doji is created when the opening and closing prices are approximately equal.

Abandoned Baby Top

Occasionally in an evening doji star pattern, a second day’s doji will occur where its low price will be higher than the first and third day’s high price, when this occurs, then it is a rare form of an evening doji star called an abandoned baby top.

Traits that Increase Likelihood of Evening Star Trend Reversal

Steve Nison (1991, p. 63) suggests the following attributes of an evening star pattern increase the likelihood of a trend reversal:

A gap occurs between the first day’s candlestick real body and the second day’s candlestick real body and a gap between the second day’s candlestick real body and the third day’s candlestick real body.

The more the penetration of the close of the bearish candlestick on the third day into the price levels of the first day’s bullish candlestick, the stronger the bearish sentiment.

There is low volume for the first day’s bullish candlestick, but in contrast, there is high volume on the third day’s bearish candlestick. High volume reinforces that bears are serious about having reversed the previous bullish uptrend.

Psychology of Evening Star Candlestick Reversal Pattern

The market psychology of the evening star candlestick pattern is explained as follows: The first day of the evening star candlestick is a large bullish candlestick that reinforces the existing uptrend. Next, the second day candlestick opens higher than the prior day’s close, thus gapping up and proving once again that the bulls are in control of the current market. Unfortunately for the bulls, prices are not able to be pushed very much higher. This second day doji or small real body suggests that there is a stalemate between the bulls and the bears. The stalemate is broken on the third day, when the bulls prove they are in power by creating a long bullish candlestick.

Evening Star Candlestick Chart Example

The chart above of the Energy SPDR ETF (XLE) is an example of a morning star candlestick pattern. The previous six days could be characterized as an uptrend, with the first day of the evening star pattern being a bullish candlestick. The second day gaps up and opens above the closing price of the first day. So far this is a continuation of the prior bullish uptrend. However, after rising a little more from the opening, prices stall and bears are able to make a push lower ending the day with a small bearish candlestick. The third day is required in order to complete the evening star candlestick pattern. If the third day opened higher, then it would be clear that bulls are still in charge and that this is just a further continuation higher. However in the chart above, the third day candlestick opened lower and closed the day having completely eliminated the gains (plus more) of the first day’s bullish candlestick and completed the evening star candlestick reversal pattern. Thereafter, an eight day downtrend began.

An evening doji star candlestick pattern is shown above on the chart of Home Depot (HD). A doji occurs on the second day and visually shows indecision. As is seen in the chart above, the doji on the second day of the evening star doji pattern opens above the close of the previous day, having gapped up. The long upper shadow of the doji shows that during the day bulls were able to push prices higher. However, the bulls move upward was counteracted equally by the bears, and by the close of the day, prices were exactly where they had started at the beginning of the day. Clarification of the morning star doji candlestick pattern occurs on the third day when prices gap down and then fall completely past the price area of the first day’s bullish candlestick real body.

The chart above is an example of a rare abandoned baby top. To qualify as an abandoned baby top, the low of the second day must be above the highs of the first and third day; hence, there is truly a gap in the price action where no trades (i.e. no volume) occurred at those price levels in between.

If the third day’s volume exceeds the first day’s volume of the evening star pattern, Steve Nison says this increases the likelihood that the evening star candlestick pattern is a bottom reversal. The chart above of Alcoa (AA) shows that the volume prior to the second day of the evening star pattern is falling; however, on the second, but especially the third day the volume increases, surpassing the volume of the first day. As a reminder, increased volume generally means more interest by traders at the price levels representing that particular trading session. In the chart above on the third day of the evening star pattern, increased volume as well as a gapping down bearish candlestick can be interpreted that many stock shares were transferred between buyers and sellers and that the sellers had to sell at lower prices in order to get the buyers to buy from them. This fearfulness by sellers to dump many shares and to sell those shares at lower prices, gives a powerful sign that bears are currently in charge.

Occasionally an evening star pattern can act as a resistance for an area of consolidation after a run up in prices. The chart above of Johnson and Johnson (JNJ) illustrates how the evening star pattern marked the future area of resistance. After the previous uptrend and the bullish candlestick of the first day of the morning doji star pattern, the second day’s doji signaled indecision. Once the bearish candlestick of the third day rejected the first day’s gain, a line was drawn on the chart by bears where they felt comfortable selling into. This resistance area was confirmed 23 days later and held.